Credit Unions Evade Most New Mortgage Rules

The Consumer Financial Protection Bureau released final mortgage rules that restrict loan originator compensation methods and increase the level of service loan servicers must provide to borrowers. However, due to the way credit unions already do business, trade associations say neither rule will have a major impact on the industry.

NAFCU President/CEO Fred Becker even questioned the need to include credit unions at all in the new rules. In a statement, Becker said that while he appreciated the CFPB’s servicing rule exemption for those servicing fewer than 5,000 transactions, he was nonetheless concerned about the regulatory costs of the rule “given that credit unions have been and continue to operate using solid, traditional lending practices and are second to none in servicing their members’ mortgages.”

Under the servicing rules, borrowers must receive information regarding options available to avoid foreclosure. The practice of dual tracking, in which a servicer proceeds with foreclosure while simultaneously working with the borrower to avoid it, will also be prohibited. The rule also mandates new disclosure and statement information.

Public Affairs Specialist John Fairbanks said another 40 are expected to exceed the threshold by January 2014, based on the average number of real estate loans originated each year. Of the approximately 6,900 federally insured credit unions, 6,700 qualified for the exemption as of Sept. 30, 2012, Fairbanks said.

However, CUNA Chief Economist Bill Hampel said the rule may affect more credit union mortgages than the numbers suggest.

“I suspect most of those loans are actually serviced by subservicers, and since servicing is a scaled business, they most likely will be covered by the rule,” Hampel said.

However, that doesn’t mean credit unions that contract out servicing out will be tasked with compliance. That burden will fall on the subservicer, Hampel said, who will have to change procedures and bear the brunt of costs to ramp up compliance.

Subservicers may increase prices to recover those costs, but Hampel said he doesn’t anticipate any potential rate hikes to be big ones. But consolidation among loan servicing firms could result from the new rules, he said.

The CFPB’s loan originator rules, in a nutshell, prohibit payments that is based on loan terms. Bureau Director Richard Cordray said in a release that the rule will ban the incentives that led originators to steer consumers into riskier, high-cost loans prior to the mortgage market meltdown.

Effective January 2014, loan originators can’t be paid more if the consumer takes a loan with a higher interest rate, prepayment penalty or higher fees. However, the CFPB did scrap a provision in its proposed rule that would have required lenders to offer a no points or fees mortgage if they were offering a mortgage with points.

Bonuses or higher pay for selling title insurance for a lender’s affiliate is also banned. Originators also are prohibited from dual compensation in which they are paid by both the consumer and the creditor.

Credit unions that sell mortgages to the secondary market should be aware that the new rule may prohibit them from paying originators more for loans that will be held on the books.

CUNA attorney Mary Dunn said the CFPB included specific examples in the final rule to demonstrate when the practice is prohibited and said one example indicated that most credit unions won’t be affected.

That example assumes lenders hold in portfolio only loans that have short terms with balloon payments, while selling 30-year term loans, which typically have higher interest rates, in the secondary market. The CFPB concluded that because the rates vary, and the originator could potentially steer borrowers into the portfolio mortgage, holding a mortgage in portfolio “is a proxy for a term of a transaction.” Therefore, paying originators more for loans held in portfolio, when accompanied by different rates “over a significant number of transactions” is prohibited under the rule.

The new rule also requires that all loan originators, even those working at credit unions, meet the same character and fitness requirements, be screened for criminal backgrounds and undertake ongoing training about mortgage regulations. That requirement, Dunn said, will result in a significant compliance burden for credit unions.

The final rule also prohibits mandatory arbitration of disputes related to mortgage loans and the practice of increasing loan amounts to cover credit insurance premiums. While most of the final rule takes effect in January 2014, these two parts will take effect June 2013.

To help with compliance, the CFPB said it will, among other things, be publishing implementation guides.

Cordray will join NCUA Chairman Debbie Matz in a town hall webinar at 3 p.m. EST on Tuesday Feb. 5 to discuss the newly released regulations, as well as proposed rules and the CFPB’s enforcement efforts.